• The markets await reports from several central banks led by the FED, BOJ, and BOE, likely to influence trading activities.
  • Rising yields continue to rattle the forex market amid concerns over rising borrowing costs. It awaits to be seen if the central banks will act.
  • Chinese economic recovery continues to gather pace going by the positive economic release.

It promises to be a busy yet volatile trading session over the next few days in the forex market. Many central bank decisions could rattle the $6 trillion marketplaces as traders wait to see what policymakers intend to do to stem rising yields. Concerns over rising inflation will also be a hot subject among policymakers likely to influence trader’s sentiments on various currency pairs.

Central bank reports

The focus will mostly be on the FOMC report on Wednesday. This month’s report comes at the backdrop of US Treasury yields rallying to one-year highs of 1.62%, conversely fuelling higher inflation fears. While the rally has triggered strength in the dollar, there are growing concerns that further gains on bond yields could result in a spike in borrowing costs, something that the US economy does not need at the moment.

Central bank reports

At the start of the week, the dollar remained upbeat, holding firm above the 91.84 against the other major currencies. The rally came as Treasury yields bounced back to one-year highs of 1.63% before retreating lower as the European session came into play. With analysts expecting policymakers to strike an optimistic tone, the dollar could strengthen further against the majors.

Similarly, the focus will be on the Bank of England meeting report on Thursday. The pandemic has taken a significant toll on the UK economy. While the British pound has strengthened against the dollar in recent weeks, it awaits to be seen what is in store in the policy front highly needed to reinvigorate activities in an economy struggling with one of the biggest slowdowns in recent history.

Continued hopes for economic recovery amid an accelerated vaccination campaign continue to offer support to the British pound. However, data showing that Brexit is having a bigger impact on the UK-EU trade could slow pound strengthening across the board.

The focus will also be on Japan on Friday as the Bank of Japan is also poised to post its policy minutes when the economy appears to be struggling with recession due to the COVID-19 disruptions.

ECB acts

The European Central Bank was the first to move and stem further gains in the European yields. While the central bank did leave interest rates unchanged, it pledged to step up its bond-buying spree to stem the further rise in the European bond yields, which policymakers fear could negatively impact borrowing costs.

The pledge resulted in the euro snapping its three-week losing streak, conversely gaining more than 1.6% against the dollar. The ECB also raised its forecast for the year, hinting that the GDP could grow by 4% in 2021, up from an initial growth forecast of 3.9%.

EUR/USD chart

However, the euro started the week on a back foot as data showed that hedge funds slashed their net euro positions the past week. The euro was down by 0.2% to $1.925. The euro looks set to continue strengthening against the dollar ahead of the FED meeting, with analysts expecting it to remain range-bound between the $1.19 and $1.23.

Weakness on the euro also came to German Chancellor Angela Merkel Christian Democratic Union party losing elections in some states. The loss in some states raised concerns about whether the CDU party chairman Armin Laschet will have the numbers to replace Merkel once he steps down in September.

Chinese economy recovery

Away from the central banks’ policy meeting, the Chinese yuan strengthened against the dollar. A plethora of economic releases hinted that the second-largest economy is bouncing back at an impressive rate.

USD/CNY chart

On Monday, economic data showed that China’s industrial activity grew 35.1% in February as retail sales jumped 33.8% year over year. The Chinese yuan strengthened across the board even as the jobless rate appeared to edge higher to 5.5% against 5.2% in the previous month.